One of my initial questions to a new potential buyer is "Have you been pre-qualified or pre-approved by a bank or lender for your purchase?" When someone asks me, "What's the difference?" I actually get excited. This is probably a first time buyer-and I love working with first time buyers! I'm a teacher at heart, and I know I can help them through the process of buying a home and make sure their home-buying experience is a good one. We can avoid some real pitfalls before we even get started!
So, what's the difference?
Pre-Qualification: Basic questions are asked of the buyer regarding buyer's income, assets, debts, and credit rating. The person preparing the pre-qualification generally will accept the buyer's statements regarding each of these items. Using these pieces of information, along with estimated property taxes, homeowner's insurance premium, and estimated cost of mortgage insurance (if less than 20% down-payment), the lender will prepare a letter stating the amount of mortgage for which the buyer is PRE-QUALIFIED. The key thought about a pre-qualification is that it is simply an estimate, under very general conditions, and is completed without pulling a credit report or requiring verification of the information supplied by the buyer.
Pre-Approval: As far as the AMOUNT of mortgage a buyer can qualify for, the mathematics are the same. However, the Pre-Approval is a HIGHER QUALITY estimate of what the buyer can reasonably afford. Why is it a higher quality estimate?
The loan officer will actually pull a tri-merge credit report with credit scores. Credit reports reveal a lot of information. Payment history, amount of debt, number of credit lines, judgments, collection accounts, whether there has ever been a bankruptcy or foreclosure, etc, and, oh, yes, those "magic numbers", your credit scores. 
The loan officer will ask for copies of pay-stubs to verify income and employment
The loan officer will ask for copies of bank statements to verify assets / savings.
You have also successfully shortened the amount of time required to get from contract to closing, as many pre-approvals also start with your full mortgage application being taken up front.
Most agents will require you to provide at least a pre-qualification letter from a lender before they will start showing you homes
Why does it matter?
•1. Your real estate agent will work harder for you. REALTORS® generally get paid on a commission basis. If you already have your pre-approval done by qualified lender, a real estate agent will know that the time they are spending searching through property information, scheduling appointments and showing you homes is an investment of their time that is likely to be beneficial to all the parties involved.
•2. You will make a better housing decision. Even after the correct price range is determined, the TYPE of mortgage you are pre-approved for can limit which houses on the market you can purchase. For instance: if you can afford that $150,000 mortgage with an FHA loan (because it allows you to spend a larger percentage of your income), then the house you purchase must be in good repair. Certain repair needs will disqualify the home from consideration by the lender. This helps make sure you are not financially derailed by a major repair need right after you buy your home.
•3. The seller will take you more seriously. When you make that offer, your real estate agent will probably be required to provide that pre-qualification or pre-approval letter to the listing agent along with your offer. How that offer is presented, and the advice given to the Seller by the REALTOR®, can be determined by how well you have proven beforehand that you are a ready, willing, and most importantly ABLE Buyer.
•4. Less STRESS! Even though buying a home is often an exciting time, it can also be stressful. The more prepared you are financially by being pre-approved, the more you eliminate additional avenues of stress in the home-buying process.
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